Initiation of Coverage Yamato Holdings: A mismatch between parcel volumes and costs

Research evidence excerpt

Initiation of Coverage Yamato Holdings: A mismatch between parcel volumes and costs

(¥)

closure of bases and the use of DX and AI, but if it were to cut fixed costs substantially, it From To % ch Cons.

could conversely weaken its earnings capability during peak periods. Therefore, 03/27E - 48.2 - 65.2

realistically, Yamato will likely have no choice but to patiently continue with modest cost 03/28E - 100.0 - 120.1

reductions over the long term. 03/29E - 114.7 - 138.5

Dual headwinds from slowing market growth and intensifying competition Yusuke Isogai, CFA

Analyst

The view that parcel delivery will grow due to the expansion of the EC market remains yusuke.isogai@ubs.com

deeply rooted, but this is now a thing of the past. In fact, signs are emerging that the +81-3-5208 6204

utilisation rate of online shopping, which had been the driver of EC market expansion, is

peaking. In addition, Japan Post, which competes in home parcel delivery, has set an

ambitious target of increasing Yu-Pack handling volume at an annual rate of +3.7%,

while EC operators are also expanding their in-house logistics capabilities. We think

competition among parcel delivery companies is likely to intensify.

Valuation: A turnaround appears to be priced in

Yamato's FY3/28E PER of 20X is higher than SG Holdings' 14X. The equity market

appears to view Yamato's weak profit margins as temporary. However, we believe cost

reductions alone will not resolve the company’s structural issues, and we conclude that

the current multiple is unsustainable. Our price target of ¥1,600 is based on a FY3/28E

PER of 16X. This is broadly in line with the implied fair P/B of 0.9X, based on our forecast

average ROE of 6.3% for FY3/28-FY3/31 and a cost of equity of 7.1%. If quarterly